Showing papers on "Limit price published in 1987"

Menu Costs and the Neutrality of Money

Abstract: A model of endogenous price adjustment under money growth is presented. Firms follow (s,S) pricing policies, and price revisions are imperfectly synchronized. In the aggregate, price stickiness disappears, and money is neutral. The connection between firm price adjustment and relative price variability in the presence of monetary growth is also investigated. The results contrast with those obtained in models with exogenous fixed timing of price adjustment.

The Cyclical Behavior of Marginal Cost and Price

Abstract: The author examines the cyclical behavior of price/marginal cost margins for U.S. manufac turing after 1956. Short-run marginal cost is markedly procyclical. This is primarily due to procyclical overtime payments, incurred beca use employment is not perfectly flexible. In most industries, output price fails to respond to the cyclical movement in marginal cost; so price/marginal cost margins are markedly countercyclical. The res ults contradict business cycle theories that explain low production i n a recession by a high real cost of producing; they support theories that explain low production in a recession by the inability of firms to sell their output. Copyright 1987 by American Economic Association.

Competition and the Number of Firms in a Market: Are Duopolies More Competitive Than Atomistic Markets?

Abstract: This paper uses a variant of the standard search model to examine market equilibrium and the consequences for market equilibrium of an increase in the number of firms. If marginal search costs increase with the number of searches, then the demand curve facing any firm will be kinked, with the elasticity of demand with respect to price decreases being less than with respect to price increases; prices may not change in response to changes in marginal costs. As the number of firms increases, the maximum price that is consistent with equilibrium increases, to the monopoly price, but the minimum price decreases. On the other hand, if marginal search costs decrease with the number of searches, equilibrium, if it exists, is characterized by a

Price Discrimination Through Offers to Match Price

Abstract: In this paper, a firm discriminates between two classes of customer who have a different cost of information by coupling a list price with an offer to match the pr ice of any other shop. If the list price elsewhere is lower, the firm will be successful in discrimination. The list price of each firm is increasing in the number of sellers and the total sales are decreasing in the number of sellers. Furthermore, if sellers coordinate, they discriminate more efficaciously and increase their profits by increasing their total sales.

Predation, mergers, and incomplete information

Abstract: This article examines the strategic pricing of duopolists in anticipation of a takeover of one by the other. In equilibrium the acquiring firm may expand its output to signal that it is a low-cost rival and thereby improve the takeover terms. If the merged firm willface potential entry, a premerger expansion of output may be necessary to deter entry and to make the merger profitable. In that case the acquiringJirm's output expansion increases industry concentration by facilitating the takeover and by deterring entry. This establishes the rationality of predatory output expansions, even when a merger or a takeover is possible and, indeed, anticipated. * A voluminous literature is devoted to exploring the role of pricing in altering industry structure to achieve monopoly power. That literature discusses both price-cutting to drive existing rivals from the industry (predatory pricing) and setting low prices to deter potential entrants (limit pricing). The former has received the lion's share of the attention of antitrust commentators and enforcers, but the rationality of predatory pricing has been seriously questioned. The major criticism has two parts: (i) takeovers are a superior means of achieving monopoly power and, where legal, should therefore be used instead of price-cutting; and (ii) if a takeover is anticipated, premerger price-cutting merely dissipates some of the value of the merging parties and would thus be irrational. The first argument was originally advanced by McGee' (1958) and later by Telser (1965) and Bork (1978). The essential idea is that since predation is costly, firms should realize that a more profitable arrangement (in the form of a merger) exists and ought to be negotiated. The second argument is a natural extension of the first. In response to this criticism Yamey (1972) provides two arguments. First, the aggressor knows that he may face other rivals in the future (entrants into this or other markets). Those potential rivals may draw inferences from his current behavior about the response they will face if they enter. In that case the aggressor may wish to develop a reputation for aggressive behavior. Second, even if a takeover is anticipated, the terms of the takeover may be affected by the pretakeover pricing.

Second sourcing and the experience curve: price competition in defense procurement

Abstract: We examine a dynamic model ofprice competition in defense procurement that incorporates the experience curve, asymmetric cost information, and the availability of a higher cost alternative system. We model acquisition as a two-stage process in which initial production is governed by a contract between the government and the developer. Competition is then introduced by an auction in which a second source bids against the developer for remaining production. We characterize the class of production contracts that are cost minimizing for the government and that induce the developer to reveal private cost information. When high costs are revealed, these contracts result in a credible cutoff of new system production in favor of the still higher cost alternative system.

Modeling the Farm-Retail Price Spread for Beef

Abstract: A new model for the farm-retail price spread, which accounts for both farm supply and retail demand changes, is introduced. This model is applied to beef, and its empirical performance relative to the markup pricing formulation is evaluated using nonnested testing procedures. The results are consistent with theory and indicate the In recent years the real farm price of beef has declined despite a secular decline in beef production. This suggests demand as well as supply changes are important in explaining price changes. Farm-level demand for beef is influenced by changes in both consumer demand and the farm-retail price spread for beef. This paper focuses on factors affecting the price spread by estimating and testing alternative empirical specifications of the farm-retail price spread for beef. A common approach to modeling price spread behavior is to assume the price spread is a combination of both percentage and constant absolute amounts (Waugh; George and King). This suggests an empirical specification in which the price spread is related to retail price and marketing input prices. This modeling approach has been applied to beef by Freebairn and Rausser, Arzac and Wilkinson, and Brester and Marsh. As emphasized by Gardner (p. 404) the problem with this approach is that the relationship between farm

Price Discrimination and the Adoption of the Electricity Demand Charge

Abstract: Between 1905 and 1915, as state price regulation became widespread, electric utilities in the United States faced severe competition. The primary source of electricity for industry then was not utilities but self-generation by the user in an “isolated plant.” The demand-charge rate structure first became widespread during this period. The demand-charge rate structure has been interpreted as a misapplication of the peak-load pricing principle, a view which has made its popularity a puzzle. Instead it was adopted as a sophisticated mechanism which institutionalized profit-maximizing price discrimination given the competition from isolated plants.

Equity, Efficiency and Financial Viability: Public‐Utility Pricing with Special Reference to Water Supply

Abstract: The pricing and investment policies of a public enterprise should be designed to achieve efficiency since equity is better pursued by general policy regarding income distribution. Short-run marginal-cost pricing does not generally lead to long-term deficit, but may involve price and surplus/deficit cycles for the case with lumpy investments and growing demand, where the price increases with demand but is reduced with capacity expansion. Taking account of the extra costs of government revenue collection and the likely average price/cost ratio in the economy, the third-best pricing policy is likely to result in long-term surplus, making the objectives of equity, efficiency and financial viability much more consistent with each other than is generally believed. This is particularly true for water with historically increasing costs of additional sources of supply.

Advances in Economic Theory: Battles for market share: incomplete information, aggressive strategic pricing, and competitive dynamics

Abstract: In the last five years, economists have begun to apply the theory of games of incomplete information in extensive form to problems of industrial competition. As a result, we are beginning to get a theoretical handle on some aspects of the rich variety of behavior that marks real strategic interactions but that has previously resisted analysis. For example, the only theoretically consistent analyses of predatory pricing available five years ago indicated that such behavior was pointless and should be presumed to be rare; now we have several distinct models pointing in the opposite direction. These not only formalize and justify arguments for predation that had previously been put forward by business people, lawyers, and students of industrial practice; they also provide subtle new insights that call into question both prevailing public policy and legal standards and various suggestions for their reform. In a similar fashion, we now have models offering strategic, information-based explanations for such phenomena as price wars, the use of apparently uninformative advertising, limit pricing, patterns of implicit cooperation and collusion, the breakdown of bargaining and delays of agreement, the use of warranties and service contracts, the form of pricing chosen by oligopolists, the nature of contracts between suppliers and customers, and the adoption of various institutions for exchange: almost all of this was unavailable five years ago.

Market behavior of grains exporters

Abstract: This article develops and tests several models of market behavior over the 1965-81 period to identify the market behavior of each of the five largest grain exporters in rice, wheat, and coarse grains. The results show that the United States has exerted price leadership in the rice and coarse grains markets. The remaining major exporters in these markets have behaved in a manner consistent with a small country exporter model in which their market demand is perceived to be perfectly elastic at the world price set by the dominant exporter. The short-run export supply curves for the five largest exporters appear to be very unresponsive to price. For rice, only Japan's exports were found to have a significant and positive response to an increase in the world export price. For wheat and coarse grains, only the United States' exports were estimated to be positively and significantly related to the export price. An important implication of the current market behavior of the major exporters is that the opportunity exists for all other exporters to sell all they can at the world price. A significant risk exists that the United States will stop supporting the world price through its loan rate mechanism. A provision for such a change was included in the Food Security Act of 1985 for wheat and coarse grains and has already been implemented for rice.

Estimation of the demand for electricity

Abstract: The residential consumer of electricity is often faced with a price schedule, where the price per kWh differs according to the amountof electricity consumed. 1 Instead of a single price per kWh, a price schedule exists, from which electricity is purchased in blocks at a decreasing marginal price. In a econometric demand analysis of household electricity consumption, one of the main questions is concerned with the price varible to be chosen. Should it be the marginal price, the average price, or perhaps both price varibles? In this study, residential demand functions for electricity are estimated employing different price variables. In demand functions employing both average price and marginal price the coefficients on average price are ‘right’; the negative signs reflect the expected inverse relationships between the quality of electricity demanded and the average price. On the other hand, nonsignificant but positive signs on marginal price are obtained. This result contradicts the findings of Roth (1981)...

On inflation and real price variability

Abstract: This paper studies the consequences of costly price adjustments for the variability of real prices accompanying inflation. For constant-elasticity demand and cost of production it is shown that a higher demand, a lower cost of production, or a lower cost of price adjustment leads to less intertemporal variability of real prices. If the marginal cost of production does not increase “too” fast, then the average real price is less than the real price that would prevail in the absence of inflation; additionally, a higher demand, a lower cost of production, or a lower cost of price adjustment leads to a higher level of real prices.

Price Asymmetries in the Demand for Energy

Abstract: In the decades prior to 197 3, real energy prices were flat or gradually declining and aggregate energy use grew roughly in proportion to economic activity. Between 1973 and 1981, energy price increases were pervasive and as a direct result the growth in energy use was significantly reduced or reversed. Energy conservation became a dominant force in energy markets. Recently the price of oil has plummeted, and arguably we have entered a period of great fluctuations in the world oil price and thus in many energy prices.

Entry deterrence under trade unions

Abstract: This paper argues for the integration of labor unions in the analysis of industrial organization. Such a linkage is important for at least two reasons: First, unions are often concentrated in big firms, which tend in general to face an imperfectly competitive environment in their product markets. Second, unions are usually able to extract. in the form of higher wages, some rents which result from the market power of firms [see for example Freeman and Medoff (1984) on the impact of unions on firm profitability in the U.S.A.]. Firms should thus take union behavior into account, and in particular realize that strategies toward rival firms will tend to affect unions’ ability to extract rents. We illustrate here the impact of unions in industrial organization by focusing on the topic of entry deterrence (ED). In section 2, we first argue that unions tend to lower the profitability of two standard, widely studied ED strategies: limit pricing under incomplete information, and the use of sunk costs. Section 3 then turns to union contracts as a possible alternative ED strategy available to incumbent tirms. Finally, section 4 assesses the welfare impact of unions in these settings, while section 5 suggests directions for research.

Price behaviour in European countries: testing the law of one price in the short– and long–run at various levels of aggregation

Abstract: The objectives of this paper are to test the relaltive version of the law of one price in the short and the long run at various levels of aggregation for traded goods. The use of an error-correction model is made to test the validity of the hypothesis in the short run with a built-in tendency to one price in the long run. Using unit value trade data at the aggregate, 2-digit and 3-digit levels of the Standard International Trade Classification, the law of one price is generally rejected in the short run, although a long-run proportional relatlionship between prices of fairy homogeneous products are used the hypothesis is rejected both in the short and long run. This suggests that non-price changes which are likely to be incorporated in unit values are probably gradual and affect EEC countries in a similar manner. Price changes, however, are somewhat erratic and hence with unitvalue data, the law of one price in the long run is not contradicted, while it is refuted at the disaggregate level when price data...

A Dynamic and Stochastic Model of Price Leadership

Abstract: This paper examines the optimal output strategy of a dominant firm or a cartel attempting to maximize the present value of its stream of profits from a market with potential entry. The rate of entry into the industry is assumed to be a function of the current price only and entry is defined as an increase in output from competitors which might or might not be already in the market. In the dominant firm model, the dominant firm quotes the market price and competitors supply all they want at that price. The dominant firm then supplies the demand not met by rivals at the given price. If the barriers to entry are great, the dominant firm can produce the short run profit maximizing level of output with little fear of losing its market share. However if entry is relatively easy, the firm can increase its output to the point where the price corresponding to aggregate industry supply induces no entry. This price has been defined as the limit price.

Advertising and Limit Pricing

Abstract: We enrich Milgrom and Roberts' (1982) limit-pricing model to allow an incumbent to signal his costs with both price and advertisements. Our fundamental result is that a cost-reducing distortion occurs, in that the incumbent behaves as if there were complete information but his costs were lower than they are. Preentry price is therefore distorted downward, and demand-enhancing advertising is distorted upward, as a consequence of signalling. If advertising is a purely dissipative signal, it is not used, nor therefore distorted. Recent refinements of the sequential equilibrium concept are featured.(This abstract was borrowed from another version of this item.)

Alternative price specification for municipal water demands: an empirical test

Abstract: Based on data from 92 Minnesota cities, the analyses shows that neither marginal price or average price appear as the better predictor of demand. The price elasticity of demand ranges from -. 17 for marginal price in the linear model to -.27 for average price in the log linear model. It appears from the analysis that many consumers are unaware of the marginal price of their water. Thus utilities should simplify their pricing structures and present consumers with an easy to understand costs of water such as the cost of six hours of lawn watering.